When Should A Creditor File A Bankruptcy Adversary Action?

Typically, creditors have little to no recourse when a debtor files for Chapter 7 or Chapter 13 bankruptcy. Unless the debtor has sufficient non-exempt assets to pay all of his creditors, or the debts are secured by homes, cars, or other tangible items, the debts will likely be discharged – i.e., wiped out – leaving creditors with little to no recovery on their debt.

In certain instances, however, debtors cannot discharge debts because of how debtors incurred the debt. If

The debt was obtained by false pretenses, false representation, or actual fraud; or

The debt arose from fraud or misappropriation of funds when debtor was acting in a fiduciary capacity; or

The debts are for willful and malicious injury by the debtor to another entity or person,

the debt is not dischargeable and will survive the bankruptcy. To get a non-dischargeability determination, a creditor must file a separate lawsuit in bankruptcy court – an “adversary action” – and prove one of the three factors above.

In some cases, a creditor or party-in-interest can also file an adversary action to dismiss the debtor’s bankruptcy filing in its entirety. In these actions, the creditor or party-in-interest must show:

With an intent hinder, delay, or defraud, the debtor intentionally transferred, destroyed, or concealed property within one year prior to filing the bankruptcy, or after filing; or

The debtor concealed, falsified, or destroyed books and records showing the debtor’s financial position; or

The debtor knowingly made a false oath or account, presented a false claim, etc.

If you are a creditor and are interested in filing an adversary action against a bankruptcy debtor, or if you are a bankruptcy debtor defending against an adversary action needing bankruptcy litigation counsel, please call Jonathan P. McQuade at Beresford Booth PLLC.

Beresford Booth PLLC

Beresford Booth is a full-service law firm located in Edmonds, WA. Our clients range from small startup companies to families to growing businesses. We pride ourselves on providing first-class legal services in a practical, creative and timely fashion. We proudly serve clients across Washington State and throughout the Pacific Northwest.

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